Why Teens Should Have Roth IRAs

By Dave Carpenter, AP Personal Finance Writer

CHICAGO (AP) — Saving for a teenager's retirement might sound far-fetched to parent and child alike, especially with college costs looming. Who's got time or money to be planning for the 2060s?

Yet setting up a Roth individual retirement account for your teen can be a smart and rewarding move to consider at tax time. You don't have to be rich to do it, either.

It makes good sense to set aside money that can grow many times over by the time it's put to use. And establishing an IRA with a teen's own cash — perhaps supplemented by Mom and Dad or the grandparents — can convey a powerful financial message that no pep talk could match.

"It provides an opportunity to engage a generation that typically doesn't focus much on investing with something that's theirs," says John Heywood, a principal in Vanguard's retail investor group.

A Roth IRA differs from a traditional IRA in that you contribute with after-tax money but pay no taxes on withdrawals, meaning all growth is tax-free.

As with Roths for adults, not every teen qualifies and there are strict rules to follow.

You can only open one if the child has income from a job — allowances don't count. You can't contribute more than the child made in any given tax year, up to the limit of $5,000. And if you want to apply the teen's earnings from bagging groceries or waitressing last summer, the deadline for making 2009 IRA contributions is April 15.

If you are self-employed, you can employ your children, pay them salary and open a Roth on their behalf. Just make sure they do real work for a reasonable wage and you file W-2 forms reporting their earnings to the Social Security Administration.